3330%20Prelim%20II - Cornell University Fall 2009 Economics...

Cornell University Fall 2009 Economics 3330: Preliminary Examination IINovember 9, 2009 1. (12 points) True/False/ExplainState whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. No credit will be awarded if the explanation is incorrect. a. (3 points) Consider a two factor APT model. Suppose that the expected return on a portfolio is 10%, that the beta for the first factor is 1 and that the beta for the second factor is ½. If the risk premium for the first factor is 4%, then the risk premium on the second factor cannot also be 4%. b. (3 points) Even if investors are overconfident, markets may still be efficient. c. (3 points) “Survivorship bias” may lead to the conclusion that a mutual fund manager has outperformed the market when the manager has not actually done so. d. (3 points) The semistrong form of the efficient market hypothesis holds that accounting-based measures of a company’s valuation should not be related to the price of a company’s stock.

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